WASHINGTON — Creating the infrastructure for regulators to collect and analyze data necessary to monitor systemic risk is going to be costly and complicated, Federal Reserve Board Gov. Daniel Tarullo told Senate subcommittee members on Friday.
Tarullo laid out ways to fill gaps in data collection, improve how it is collected and offered the pros and cons of establishing an independent separate agency to synthesize it all versus requiring more cooperation and coordination among the regulators.
"The recent financial crisis revealed important gaps in data collection and systematic analysis of institutions and markets. Remedies to fill those gaps are critical for monitoring systemic risk and for enhanced supervision of systemically important financial institutions, which are in turn necessary to decrease the chances of such a serious crisis occurring in the future," he told the Senate Banking Committee's subcommittee on security and international trade and finance.
Tarullo said a stand-alone independent data collection and analysis agency might be more nimble than the current fractured setup where each regulator collects its own data, because it would not have to reach consensus with other agencies.
It could also foster an overall assessment of financial data needs for all governmental purposes, he said.
But, Tarullo said, there would also be significant drawbacks such as the expense of setting up a new agency and the loss of institutional familiarity with the types of institutions from which the data was collected.
He said that the "separation of data collection and regulation could also dilute accountability if supervisors did not have authority to shape the form and scope of reporting requirements by regulated entities in accordance with supervisory needs."
Some lawmakers clearly supported setting up a new agency. Sen. Jack Reed introduced a bill on Feb. 4 that would create the National Institute of Finance to collect data and develop the analytic tools needed to measure and understand systemic risk.
During the hearing, Reed said regulators lacked critical data during the financial crisis.
"This is a vital area and it could be critically overlooked," Reed said. "My impression is that a lot of the problems with Lehman [Brothers] and Bear [Stearns] and [American International Group] is that the banking institutions had no idea where their counterparty risks lay. … As a result the regulators were flying blind essentially. It was more seat-of-the-pants than systemic regulation."
Reed was backed by Allan Mendelowitz, a former board member of the Federal Housing Finance Board and now a founding member of the Committee to Establish the National Institute of Finance.
Mendelowitz said the agency should have two crucial wings: a data center and research center. The new agency should be independent and funded by industry assessments, he said.
But Sen. Evan Bayh, the subcommittee's chairman, while sounding open to the idea, said lawmakers must also consider other alternatives.
The committee must examine "whether or not a separate, additional agency is necessary or whether these new technical capabilities can be housed in an existing independent federal agency, such as the Federal Reserve," he said.
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